Question 8

The purchase of a new piece of equipment would be reflected as a cash outflow under investing activities.

Acquiring new equipment represents an investment in the business's operational capacity, which is classified under investing activities in the statement of cash flows.

A) As a cash outflow under financing activities

This option is incorrect because financing activities pertain to transactions that involve raising capital or repaying debt. The purchase of equipment does not fall under financing activities as it does not involve obtaining funds or repaying them.

B) As a cash inflow under financing activities

This option is also incorrect. An inflow under financing activities would indicate that the company received cash, such as from issuing stock or borrowing funds. Purchasing equipment does not generate cash; rather, it represents a cash outflow.

C) As a cash outflow under investing activities

This option is correct as it accurately reflects the nature of the transaction. The purchase of equipment is an investment in long-term assets, making it a cash outflow that is reported under investing activities in the statement of cash flows.

D) As a cash inflow under operating activities

This option is incorrect because operating activities typically include transactions related to the day-to-day operations of the business, such as revenues and expenses. The purchase of equipment does not generate cash inflows and therefore would not be classified here.

Conclusion

The correct classification of the purchase of new equipment as a cash outflow under investing activities is essential for accurately representing the company's cash flow position. Options A, B, and D fail to recognize the investment nature of the transaction, while option C correctly identifies it as an outflow related to long-term asset investment.